2 traps to avoid when buying ASX shares in 2023

As much as you might be a long-term investor, there is no escaping the fact that the stock markets are now not the same as they were four, two or even one year ago.

The Motley Fool’s own chief investment officer Scott Phillips admitted as much this month, when he cited the return of inflation and higher interest rates as changing the way you pick ASX shares to buy.

“Inflation matters because pricing power matters. If you are a business that can’t pass on higher costs, you have no choice but to deliver lower margins, [and] lower profits,” he said on the Your Wealth podcast.

“Rates matter to the price of the assets that I buy…, rates matter to the amount of debt a company can affordably carry and what it can do with that debt; and what my investment thesis looks like with those rates.”

He likened these conditions to a return to the 1980s and the early 1990s. 

Back to the “old normal”, if you will, after leaving behind a decade of near-zero interest rates and inflation.

So there are some ideas about what to seek in a business. But what are the attributes to avoid like the plague in this new era?

Airlie Funds portfolio manager Emma Fisher helpfully had some ideas this week:

Stay away from companies that exhibit these behaviours

Fisher, in an Airlie video, highlighted two traps that she would avoid when picking stocks for this year.

The first is debt.

Fisher cited two reasons why debt is such a negative right now compared to just eight months ago.

“If you’ve got a lot of debt, interest rates have gone up, it’ll cost you more to service that debt — so your profits are going to fall,” she said.

“The second one is around operational flexibility. Ideally, at this point in the [economic] cycle, you want to have a mountain of cash you’re sitting on as a business.”

With recessions likely looming around the world, having that cash buffer will be a huge advantage to any company — especially if competitors are struggling with servicing their loans.

The second red flag to avoid is excessive inventory levels.

“A lot of businesses — particularly retailers and consumer brands — going into the pandemic, demand was elevated and supply chains were tight. So businesses put in huge orders in order to get stock.”

But now all that stock is now sitting there while supply chains have resumed normal operations.

“You’ve got a lot of companies that are sitting on very elevated inventory levels, potentially heading into a softening demand environment,” said Fisher.

“Throw in some debt, and that can be a really toxic combination of factors.”

The post 2 traps to avoid when buying ASX shares in 2023 appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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